Real estate investment funds (REITs) are known for their high-yield dividends and The GEO Group (NYSE: GEO) it is no exception. The company, which owns and manages 123 secure private home facilities and post-correctional residential facilities with 93,000 beds in total in the United States, Australia, Africa and the United Kingdom, offers a dividend with an annualized payment of $ 1 per share. At the current price of the company’s shares, this gives it a return of around 12.6%.
This may sound great … until you find out why the yield is so high. The GEO Group’s share price fell more than 32% last year, so despite cuts in payments this year and last year, yields remain high. I am not concerned about the safety of GEO’s dividends, but the company appears to be a classic dividend trap because its revenues are tending to fall.
SOURCE OF IMAGE: GETTY IMAGES
Successes keep coming
The past year has been difficult for companies operating in private prisons. The COVID-19 pandemic meant extra costs to make prisons and immigration detention centers safer for workers, prisoners and detainees. This also led to a drop in the population of inmates.
According to The Marshall Project, the number of people incarcerated in the United States dropped from 1.3 million in March to 1.2 million in June. Prisons, in an effort to avoid bringing the coronavirus to their populations, have stopped accepting new prisoners. Closing courts meant that fewer people were being convicted and parole officers were less active and sent fewer people back to prison for parole violations.
Furthermore, with the change of government in Washington, this is not the best time to be in the private prison business. On January 26, President Biden signed an executive order instructing the Department of Justice not to renew its contracts with private prison operators.
The order applies to any private facilities related to the Bureau of Prisons and the US Marshals Service. It does not yet apply to all agencies. Immigration and Customs Enforcement, for example, has contracts with private companies, including the GEO Group, to detain undocumented immigrants.
Looking at a recent presentation of the company to investors, it is easy to see that the end result of Biden’s policy could be a 27% cut in the GEO Group’s revenue.
SOURCE OF IMAGE: The Geo Group
Even before the executive order, the Bureau of Prisons chose not to renew its contracts with three GEO facilities; these contracts expire this quarter. The company said that its remaining contracts with the Bureau of Prisons also cannot be renewed as they arise.
In March, GEO learned that Marshals Service would not renew its contract for the company’s 222-bed Queens Detention Facility in New York. The facility generated $ 19 million in annual revenue, the company said.
The dividend may be safe, but the share price is not so much
You have to give GEO credit for doing the right thing, cutting your quarterly dividend from 29.2% to 34 cents per share last year and then again by 26.5% to 25 cents per share this year.
While the cuts are worrying, the dividend looks well covered by the company’s adjusted operating funds (FFO) expected this year, which management said should be in the range of $ 1.98 per share to $ 2.08 per share. .
The company’s revenue of $ 2.35 billion in 2020 was less than the $ 2.47 billion obtained in 2019, and the net profit of $ 113 million was less than the $ 166 million the previous year. In the fourth quarter, its revenue of $ 578.1 million was down 7% year over year. It was also the fourth consecutive quarter of declines in revenue.
REITs are best analyzed based on their FFOs, and these metrics have fallen for the GEO Group as well. The company reported a normalized annual FFO of $ 229.3 million, down from $ 260.7 million in 2019; The adjusted FFO was $ 300.6 million, compared to $ 328.4 million in 2019. GEO’s adjusted FFO last year was at its lowest level since 2016.
GEO Group is fighting trends
Unlike some REITs that were adversely affected during the global pandemic by tenants who had difficulty paying rent, GEO customers are government agencies that always pay rent on time.
The difficulty facing GEO is that the population of prisoners in its facilities has been decreasing and this trend seems to continue. This means reduced revenue, which for investors means that the stock price may continue to fall and also increases the likelihood that the company will further reduce its dividends.
To some extent, future revenue drops may have already been priced in stocks, but as an investor, I don’t see any benefits for the GEO Group anytime soon.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.